Weather Stick

It's difficult to make predictions, especially about the future.

I find when I make predictions it's best to make them often. That way, you're never very wrong, just sometimes temporarily incorrect. Stock markets, like sports events, are rife with opportunities to put your neck on the line and give an opinion about the outcome. But it helps to have something to guide you in making that bold prediction. The randomness of the future has tripped up pretty much everyone at one time or another. My advice to both buyers and sellers: beware.

For centuries, the Balsam fir tree has been used by Aboriginals to give them advance warning of bad weather to come. The 'Weather Stick' is a useful guide to help warn of impending bad weather. Weather sticks work by changing their shape in response to the rise and fall in relative humidity.

Small dry branches on the underside of the tree function as an amazingly accurate predictor of future weather conditions.

I installed one on a tree outside the kitchen window (shown above) and it has been a pretty useful prognosticator. Today it is pointing down, despite the current sunny morning. A quick check of the Environment Canada radar and the Weather Network confirms that a large rain-filled system is approaching. But my stick on a tree already knew that.

What barometers can we use for the stock market then? Are they accurate? Do they give enough warning? Is using them at all helpful in predicting the anticipations of others?

Hopefully during my two plus years of blogging about the markets, I have given readers a few accurate predictions. The advice that I gave this time last year to sell may have helped, as did the advice on Christmas Eve to start buying. But this year it has been much harder to devine the future. Although markets have come a very long way and seem tired, catalysts for a full-on bear market have been evasive. Just when you think the market is about to crack, it digs in its heels.

The 'weather stick' that I use is my Risk Model. Although a bit simplistic, (like using a stick from a tree) I think it has served me well. Currently, it shows a fair degree of pessimism as demonstrated by the AAII survey and the elevated 3mo Vix. As well, the Copper/Gold ratio is decidedly negative, after having given a sell signal back in May.

But the RSI and 200DMA components of the model, having to do with price, have stayed mostly positive during the last three months. Hence the choppy sideways pattern of the major averages.

Unfortunately, the bearish implications of this model have been thwarted by a simple fact. In this era of artificially low interest rates, stocks have no alternative. That is unless you would rather hand a European government a dollar hoping that they give you back 92 cents in ten years.

So I guess that explains why my barometer is partially broken.

Strategists on Wall Street are becoming increasingly polarized in their views. Morgan Stanley's Mike Wilson (no, not the ULF Mike Wilson) has reiterated his recession call this morning. The bulls, like Tony Dwyer of Canaccord, have called for one last hurrah rally before a 2020 recession. Who is right?

The winning strategy so far this year has been to stay long those few coveted high quality assets that remain untouched by the tariff war. Companies with strong, non-cyclical business that are returning cash to shareholders through buy-backs have stood out from the crowd this year. TINA loves buy-backs.

But that is hardly an endorsement of either the economy or of the stock market. At some point you have to decide: is the reflation effort now being pursued by central bankers going to be successful? Or will it succumb to the twin depressants flowing from the U.S./China trade war and the devolution of the Eurozone economy? Could the bull market, despite the best efforts of central bankers to prop it up, possibly be dying of old age?

My weather stick model is undecided about such things. Sentiment swings are inherently unpredictable, reflecting the innate behavioural uncertainties that are embedded in the human psyche. Fear and greed are powerful drivers of behaviour. Uncertainty is currently in ascendancy - not an environment to be trifled with.

I'm sticking to both of my weather sticks, real and financial, for now. If it was good enough for the people who lived by evidence rather than guesswork, - Native North Americans - it is good enough for me.

Risk Model: 2/5 - Risk Off

This week, I'm focussing on the RSI Indicator in the Risk Model, currently stuck in neutral. I think of this indicator as a governor on the timing of risk taking. Like choosing the proverbial porridge, you want to be a risk taker when things are not too hot or two cold. In that way the model helps you not chase the market but conversely it prevents you from trying to catch a falling knife. It is a very short term indicator so think of it as a wind vane within the model. Given the weather theme this week, it occurs to me that meteorologists would make good traders.

Since the AAII Sentiment Indicator is not a contrarian component, I am waiting for a any sign of recovery in risk appetite before renewing my long stock positions. However, just like last December, it is VERY oversold! Being bearish right now is quite popular. Hmmm... fuel for a rally perhaps?